Subject: Agriculture

India’s agriculture credit increased by 500% in the last decade, however, this increase in the credit has not been reflected in the condition of the farmers. The article deals with the issues with the agri-credit in India.

Impact of credit on agriculture

• Providing credit to small farmers at a reasonable rate has been the agenda of the Centre, the States, and the Reserve Bank of India (RBI) for decades.
• However, the volume of credit has improved over the decades, its quality and impact on agriculture have only deteriorated.
• In 2011-12, the target was ₹4.75-lakh crore; now, agri-credit has reached the target of ₹15-lakh crore in 2020-21 with an allocated subsidy of ₹21,175 crores.
• Agricultural credit has become less efficient in delivering agricultural growth.

Issues with agri-credit: small farmers left-out

• In the last 10 years, agriculture credit increased by 500% but has not reached even 20% of the 12.56 crore small and marginal farmers.
•  95% of tractors and other agri-implements sold in the country are being financed by non-banking financial companies, or NBFCs, at an 18% rate of interest.
• The RBI has also questioned agricultural households with up to two hectares getting only about 15% of the subsidized outstanding loan from institutional sources (bank, co-operative society).
•  As per the Agriculture Census, 2015-16, the total number of small and marginal farmers’ households in the country stood at 12.56 crore which makes up 86.1% of the total holdings.
• As in the Situation Assessment Survey of Agricultural Households by the National Sample Survey Office (NSSO), the share of institutional loans rises with an increase in land possessed.
• This shows that the bulk of subsidized agri-credit is grabbed by big farmers and agri-business companies.

What are the reasons

• A loose definition of agri-credit has led to the leakage of loans at subsidized rates to large companies in agri-business.
• The RBI had set a cap that out of a bank’s overall adjusted net bank credit, 18% must go to the agriculture sector, and within this, 8% must go to small and marginal farmers and 4.5% for indirect loans, bank advances routinely breach the limit.
• A review by the RBI’s internal working group in 2019 found that in some States, credit disbursal to the farm sector was higher than their agriculture gross domestic product (GDP) and the ratio of crop loans disbursed to input requirement was very unevenly distributed.
•  This shows the diversion of credit for non-agriculture purposes.
• One reason for this diversion is that subsidized credit disbursed at a 4%-7% rate of interest is being refinanced to small farmers, and in the open market at a rate of interest of up to 36%.

Way forward

• The way forward is to empower small and marginal farmers by ‘giving them direct income support on a per hectare basis rather than hugely subsidizing credit.
• Streamlining the agri-credit system to facilitate higher crop loans to farmer producer organizations, or the FPOs of small farmers against commodity stocks can be a win-win model to spur agriculture growth’.
• With mobile phone penetration among agricultural households in India being as high as 89.1%, efforts to improve institutional credit delivery through technology-driven solutions can reduce the extent of the financial exclusion of agricultural households
• There is a need to reforming the land leasing framework and creating a national-level agency to build consensus among States and the Centre concerning agriculture credit reforms.

Consider the question “Growth in the agriculture sector in India has not been commensurate with the growth in the agriculture credit. What are the reasons for this disparity? Suggest the measures to deal with the challenges in agri-credit delivery.”

Conclusion

Improving the access to credit at a reasonable rate will help in increasing their income but to do that reforms in credit delivery is the need of the hour.

As per the OECD methodology, Indian farmers received negative support of Rs. 1.62-lakh crore in 2019, which implies that the government is taxing the farmers. But there are pitfalls in the methodology. The article explaines them.

The issue of support given to the farmers

• Many media reports, based on data by the Organisation for Economic Co-operation and Development (OECD), have stated that the support provided to Indian agriculture is extremely low or negative, and, therefore, net taxed.
• The OECD has estimated that Indian farmers received negative support to the extent of minus ₹2.36-lakh crore and minus ₹1.62-lakh crore in 2010 and 2019, respectively.
• Surprisingly, the negative support of minus ₹1.62-lakh crore as estimated by the OECD was higher than the total budgetary allocation of the Ministry of Agriculture at ₹1.09-lakh crore in 2019.

Issues with the OECD estimates

• Expenditure on the PM-KISAN, the National Food Security Mission, crop insurance, input subsidies such as fertilizer and electricity, are some of the measures covered under the 2019 OECD estimates.
• However, the expenditure related to the operation of minimum support price and general services is not covered by it.
• Despite the overall negative support, the expenditure of the Central and State governments on agriculture has increased substantially since 2000.
• This support increased from ₹1.61-lakh crore to ₹3-lakh crore, between 2015 to 2019, registering 85% growth.
• The massive negative market price support to the producers of different products has resulted in the total negative producer support, overshadowing the increase in the budgetary support over the years.

Market Price Support as per OECD methodology

• The market price support of a commodity is calculated by multiplying its total production with the gap between the domestic price and international prices in a relevant year.
• This methodology assumes that in case there is no government intervention in the agriculture market, then the domestic and international price of a product will converge, resulting in no gap in prices.

Why there is a focus on the price gap in OECD methodology

• The OECD assumes government interventions lead to a gap between the international and domestic prices.
• However, even if the government does not implement any program, the gap can still arise due to domestic and international factors.
• Changes in supply and demand conditions in the domestic and international market due to shocks, depressed international prices due to subsidies given by other countries, among other factors, can generate a gap.

3 Consequence of OECD’s Market Price Support methodology

• 1) If the domestic price for a product is less than its international price, then support for that product would be negative.
• 2) A negative market price support for a product in one year can turn into huge positive support in another year on account of the relative movement of domestic and international prices.
• 3) Even if in a particular year, the government does not provide any additional support compared to a previous year, the level of support calculated by the OECD can change.
• This will arise if there is a change in either the gap between the domestic price and international price for a commodity, or its production, in the two years.
• Given the unpredictability in the inherent data, the total support can move from huge negative to huge positive.

Concerns for India

• For India, the negative support as a percentage of the total value of agriculture production has substantially reduced in recent years.
• It is possible that support to Indian farmers in the near future becomes one of the highest in the world due to pitfalls in the OECD methodology.
• This might set alarm bells ringing, particularly in the developed countries, which may aggressively question India’s support measures.

Consider the question “As per the OECD methodology, net support provided by Indian government to its farmers is negative for the year 2019. However, India’s expenditure on agriculture is consistently rising. What explains this conundrum? What are the concerns for India in the price support method of OECD?”

Conclusion

Rather than being swayed by the OECD numbers suggesting negative support, farmers, policymakers, and other stakeholders need to understand the pitfalls and limitations in the underlying methodology. This will help in providing a more correct perception of the level of support to agriculture in India.

Basic parameters to design optimal agri-food policy

• UN population projections (2019) indicate that India is likely to be the most populous country by 2027.
• By 2030, the country is likely to have almost 600 million people living in urban areas, who would need safe food.
• Indian agriculture has an average holding size of 1.08 hectares (2015-16 data) while engaging 42 percent of the country’s workforce.
• Cultivable land and water for agriculture are limited and already under severe pressure.

What should be the basic features of agri-policy

• 1) It should be able to produce enough food, feed, and fibre for its large population.
• 2) It should do so in a manner that protects the environment — soil, water, air, and biodiversity and achieves higher production with global competitiveness.
• 3) It should enable seamless movement of food, keeping marketing costs low, save on food losses in supply chains and provide safe and fresh food to consumers.
• 4) Consumers should get safe and nutritious food at affordable prices.

Need to change from sub-optimal to optimal policies

• Free electricity and highly subsidized fertilizers, especially urea, are damaging groundwater levels, especially in the Green Revolution states.
• Sugar and wheat are being produced at prices higher than global prices, and these crops can’t be exported unless they are heavily subsidized.
• Excessive stocks of wheat and rice with the Food Corporation of India (FCI) are putting pressure on the agency’s finances.
• Rice remains globally competitive, but it should be remembered that in exporting rice we are also exporting massive amounts of precious water — almost 25-30 billion cubic meters, annually.
• This is the water that is pumped for rice cultivation, enabled by the subsidized power supply.
• In the marketing segment also, for most of our agri-commodities, our costs remain high compared to several other developing countries due to poor logistics, low investments in supply lines, and high margins of intermediaries.
• All these are signs of sub-optimal agri-food policies.

Policy changes required: On the production level

• Green Revolution states of Punjab, Haryana, and western Uttar Pradesh require crop diversification.
• This can be done by switching from the highly subsidized input price policy (power, water, fertilizers) and MSP/FRP policy for paddy, wheat, and sugarcane, to more income support policies linked to saving water, soil, and air quality.
• The Agri-marketing segment is also in the need of reforms especially with respect to bringing about efficiency in agri-marketing and lowering transaction costs.
• It is believed that developing countries should invest at least one percent of their agri-GDP in agri-R&D and extension.
• India invests about half.
• It needs to double with commensurate accountability of R&D organizations, especially the ICAR and state agriculture universities to deliver.

Policy changes required: On the consumption level

• The biggest challenge for the next 10 years is that of malnutrition, especially amongst children.
• The public distribution of food, through PDS, that relies on rice and wheat, and that too at more than 90 percent subsidy over costs of procurement, stocking, and distribution, is not helping much.
• It is increasing the finances of FCI, whose borrowings have touched Rs 3 lakh crore.
• To address that, beneficiaries of subsidized rice and wheat need to be given a choice to opt for cash equivalent to MSP plus 25 percent.
• The FCI adds about 40 percent cost over the MSP while procuring, storing, and distributing food.
• This cash option will save some money and also lead to supplies of more diversified and nutritious food to the beneficiaries.

Consider the question “What are the issues with India’s agri-food policies? Suggest the changes in agri-food policies so as to make them optimal.

Conclusion

What we need is to set agri-food policies on a demand-driven approach, protecting sustainability and efficiency in production and marketing, and giving consumers more choices for nutritious food at affordable prices.

The article explains the purpose of Minimum Support Price (MSP) and reasons for insecurity in farmers regarding its continuance.

Relation between MSP and time-bound procurement through PPS

• MSP, public procurement system (PPS) and a strict time-bound purchase of output brought to the PPS(through APMCs) form a package deal.
• Take out one aspect, the deal falls apart.
• For example, if you have MSP but not compulsory PPS, the support price becomes redundant.
• If you have MSP and PPS/APMC mandi but not strict time-bound purchase of the product brought to the PPS, the deal will fail.

Purpose of MSP

• At the launch of the Green Revolution, MSP and PPS were designed to assist the country in achieving its goal of food self-sufficiency, which was met by the early Seventies.
• The purpose of MSP and PPS/APMC is now two-fold.
• One, to maintain food self-sufficiency because crop diseases and weather conditions such as droughts.
• The second purpose is to ensure a reasonable, assured income to the farmers.
• The recommendation to dismantle FCI public procurement, made by the Shanta Kumar Committee in its 2015 report, displayed a lack of recognition of the importance of these two purposes.

Issues with the Farm bills

• The government’s assurance that MSP/APMC can co-exist with the big agro-business-controlled private markets is not tenable.
• A farmer who has reached a contract will not be legally allowed to take the product to APMC if the APMC mandi offered him/her a better price.
• The agro-business entity will take the non-compliant farmer to court, where the dispute resolution mechanism is stacked against the farmer due to the structural inequities of legal resources and social-cultural capital.
• The proposed dispute resolution mechanism increases the choice of the trader to trade and not of the farmer to sell.
• The central law will prevail in the private markets, while state laws will prevail in the APMC mandis.
• Two markets with two regulatory frameworks will create conditions for perpetual Centre-state conflicts.
• MSPs are announced for 23 crops but compulsory and timely public procurement, are provided mainly for two crops, wheat and rice, the support price does not work for the remaining 21 crops. 

Challenge in defining MSP

• Farmers’ organisations are insisting on the Swaminathan Committee formula of C2+50 per cent.
• The MSP announced by the government is based on the A2+Fl+50 per cent formula.
• Unlike the C2+50 per cent formula, A2+Fl+50  formula does not cover all the costs of farming.

Conclusion

Agrarian reforms that recognise the importance of ecologically and economically sustainable agriculture are an absolute necessity. Such reforms would require more than merely changing the trade emphasis of existing laws. They will involve the creation of inclusive, transparent and well-informed laws compatible with these reforms.

Back2Basics: Understanding the cost formula

• M S Swaminathan committee recommended minimum support prices (MSP) for crops at levels “at least 50 per cent more than the weighted average cost of production”.
• The National Commission on Farmers did not elaborate on what really constituted “weighted average cost of production” in its report submitted in October 2006.
• The Commission for Agricultural Costs and Prices (CACP), on the other hand, gives three definitions of production costs: A2, A2+FL and C2.
• A2 costs basically cover all paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel, irrigation, etc.
• A2+FL cover actual paid-out costs plus an imputed value of unpaid family labour.
• C2 costs are more comprehensive, accounting for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL.